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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: patron_anejo_por_favor who wrote (27025)	4/6/2005 10:28:05 PM
From: orkrious	Read Replies (3) \| Respond to of 116555

UFB. it's amazing how history rhymes

To: patron_anejo_por_favor who wrote (27025)	4/6/2005 11:10:42 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

The General Motors Questions S&P Needs to Answer: Mark Gilbert quote.bloomberg.com April 6 (Bloomberg) -- Standard & Poor's published a report on March 30 to address ``questions that have been asked frequently'' about its credit rating of General Motors Corp. S&P must be taking calls from a different crowd than the readers who pepper my e-mail box with queries. The rating company says the most frequently asked questions concern the consequences of the automaker losing its BBB- grade and falling to junk; why General Motors has the same rating as its finance unit; whether S&P is ``reassessing'' its rating approach; and the company's ``increasing reliance'' on asset-backed bonds as a reason to worry. Here are what I reckon are the most frequently asked questions about S&P and its General Motors rating. For potential answers, I've turned to comments S&P has made in its research reports about the company. A spokeswoman for S&P in London declined to comment for this column. 1) Why haven't you cut General Motors to junk? ``The rating outlook is revised to negative from stable, reflecting heightened concerns regarding the profit potential of GM's core North American automotive business in the wake of the company's dramatically revised earnings and cash flow guidance. Consolidated debt outstanding totaled $301 billion at Dec. 31, 2004.'' 2) Maybe I wasn't clear enough. Why haven't you cut General Motors to junk? ``We now view the rating as tenuous. The rating can tolerate several quarters of weak profitability and cash flow, but only under the assumption that financial performance will improve to more satisfactory levels thereafter. The rating could be lowered at any point if we came to doubt that GM was on a trajectory to realizing such improvement. In keeping with our policies, the rating would not necessarily be placed on CreditWatch prior to a downgrade.'' 3) Which bit of ``Why haven't you cut General Motors to junk?'' don't you understand? ``Its U.S. market share reached a record low of 24.4 percent in February, and substantial production cuts have been necessary. This year represents a hiatus for GM in its product renewal cycle. But confidence that performance will be bolstered by the eventual introduction of new products is diminished because sales of major new products it has introduced recently have generally not met expectations. Of greater consequence for profitability, GM has experienced marked sales weakness across its midsize and large sport utility vehicles (SUVs), despite significantly increased incentives. These products previously had contributed highly disproportionately to GM's earnings. However, industrywide demand for SUVs has evidently stalled, partially explained by persistent high gasoline prices.'' 4) So customers don't like the new models you were expecting to bolster profit. Presumably the company is still making money, otherwise you would have cut the rating, wouldn't you? ``The company now expects full-year 2005 earnings per share of $1.00 to $2.00, compared with previous guidance of $4.00 to $5.00. Moreover, GM's automotive operations are now expected to generate a substantial cash deficit, instead of contributing the previously targeted $2 billion surplus. Based on management's March 16 guidance, we now believe parent-level cash outflow could well exceed $5 billion this year, taking account of negative automotive operating cash flow (as defined by management) of $2 billion, cash restructuring costs related to GM's ailing European operations, payment by GM of its common dividend ($1.1 billion in 2004), payments by GM to Fiat SpA totaling approximately $2 billion, related to the recently announced agreement to sever the alliance between the two companies, various near-term parent-level debt maturities, and GM's receipt of a planned $2 billion dividend from GMAC.'' 5) Hang on. When you cut the rating by one level on Oct. 14, you said it was ``highly unlikely'' that GM would generate negative cash flow. Now you're expecting a cash OUTFLOW of as much as $5 billion this year, and you STILL haven't cut the rating to junk? ``We believe there is some downside risk in management's guidance, particularly because automotive operating cash consumption has evidently exceeded $2 billion to date this year, implying the need for the company to generate positive cash flow from operations for the balance of the year. The recent rapid erosion in GM's near-term performance prospects points up its high operating leverage and the relative lack of near-term earnings and cash flow visibility.'' 6) All of which suggests things have gone from bad to worse. So why are General Motors and its finance unit, General Motors Acceptance Corp., still rated BBB-? It couldn't be anything to do with a reluctance to cause turmoil in the corporate bond market, could it? ``GMAC has substantial ongoing funding needs. As of Sept. 30, 2004, short-term debt (including current maturities of long-term debt) was $87.6 billion, not including maturing off-balance-sheet securitizations. Reflecting the close linkage between GMAC and GM, GMAC's funding flexibility has suffered in recent years from the problems affecting GM's automotive operations. Thus, GMAC's unsecured bond spreads have been volatile, calling into question the extent to which GMAC can rely on consistent future access to the public unsecured debt market.'' 7) I think I'm beginning to understand. General Motors owes its bondholders almost $114 billion, of which $16 billion is repayable this year. A cut to junk would make it harder to refinance that borrowing. And the jobs of 324,000 employees would be on the line. ``Even if we believed a rating downgrade could result in liquidity problems for GM/GMAC, this would not be a reason for us to refrain from taking such an action if we believed erosion in GM/GMAC's credit quality warranted it.''